Thursday, April 30, 2009

The Public Pension Shakedown: Why would a smart guy invest in a movie named 'Chooch'? - (online.wsj.com) President Obama's auto fix-it man, Steven Rattner, is in the news as one of the Wall Street financiers hit up for big money as part of New York state's unfolding pension-kickback scandal. The White House says he's done nothing wrong, and there's no public evidence that he broke any laws. But Mr. Rattner's high profile is nonetheless useful in drawing attention to the real story here, which is the growing evidence of corruption by officials who use their power over public pension funds to shake down private companies. This is the same political class that has been blaming banks for "greed" in the financial crisis. The pension fund scandal exposes the myth of the superior virtue of the public and nonprofit worlds. Greed is universal. And the opportunity for corruption is enormous when political discretion is tied to vast sums of public money. New York Attorney General Andrew Cuomo and the Securities and Exchange Commission allege that investment firms paid politically connected "placement agents" in return for a piece of New York's $122 billion pension fund. The AG has indicted three politicos for kickbacks, but the media have focused on the private firms that hired some of these political agents. Thus the attention on Mr. Rattner, who as co-founder of the Quadrangle investment firm met with a consultant about paying a finder's fee for pension cash. The motive and knowledge of these private investors need to be explored, but the main culprits are the public officials and their agents. Former New York Comptroller Alan Hevesi resigned in 2006 after pleading guilty to unrelated charges of defrauding the government. But his office served as exclusive manager for the pension fund that is one of the world's biggest institutional investors. What the New York scam is laying bare is the extent to which officials allegedly leveraged those taxpayer dollars to enrich themselves and increase their political power. For the record, it isn't illegal for investment firms to hire "placement agents." Hedge funds and private equity firms have long outsourced their marketing to companies whose job it is to reach out to potential investors and arrange roadshows. These placement agents are typically paid a percentage of the money raised. In New York, however, the agents were also major political players. Hank Morris is a noted Democratic strategist and was a top adviser and chief fundraiser for Mr. Hevesi; Mr. Cuomo has indicted him for money laundering and bribery. Former Liberal Party boss Raymond Harding had aided in Mr. Hevesi's election. When men like these come knocking on investment-house doors, the message is pay to play. Mr. Morris and associates are alleged to have made $30 million selling access to the fund. Mr. Harding helped to clear a state Assembly seat for Mr. Hevesi's son, and was allegedly rewarded by being allowed to pocket $800,000 as a pension placement agent. The indictment says Mr. Morris was aided by former deputy comptroller David Loglisci, who made clear to investment firms that they should hire Mr. Morris and who signed off on the subsequent pension fund investments. (All three men deny the charges. Mr. Hevesi, who hasn't been charged in this case, also denies any wrongdoing.)

Democratic Lawmaker Is Said to Have Agreed to Aid Crooked Israeli Lobbyists - (www.nytimes.com) One of the leading House Democrats on intelligence matters was overheard on telephone calls intercepted by the National Security Agency agreeing to seek lenient treatment from the Bush administration for two pro-Israel lobbyists who were under investigation for espionage, current and former government officials say. The lawmaker, Representative Jane Harman of California, became the ranking Democrat on the House Intelligence Committee after the 2002 election and had ambitions to be its chairwoman when the party gained control of the House in 2006. One official who has seen transcripts of several wiretapped calls said she appeared to agree to intercede in exchange for help in persuading party leaders to give her the powerful post. One of the very few members of Congress with broad access to the most sensitive intelligence information, including aspects of the Bush administration’s wiretapping that were disclosed in December 2005, Ms. Harman was inadvertently swept up by N.S.A. eavesdroppers who were listening in on conversations during an investigation, three current or former senior officials said. It is not clear exactly when the wiretaps occurred; they were first reported by Congressional Quarterly on its Web site. The official with access to the transcripts said someone seeking help for the employees of the American Israel Public Affairs Committee, a prominent pro-Israel lobbying group, was recorded asking Ms. Harman, a longtime supporter of its efforts, to intervene with the Justice Department. She responded, the official recounted, by saying she would have more influence with a White House official she did not identify. In return, the caller promised her that a wealthy California donor — the media mogul Haim Saban — would threaten to withhold campaign contributions to Representative Nancy Pelosi, the California Democrat who was expected to become House speaker after the 2006 election, if she did not select Ms. Harman for the intelligence post. Ms. Harman denied Monday having ever spoken to anyone in the Justice Department about Steven J. Rosen and Keith Weissman, the two former analysts for Aipac. Her office issued a statement saying, “Congresswoman Harman has never contacted the Justice Department about its prosecution of present or former Aipac employees.” The statement did not, however, address whether Ms. Harman had contacted anyone at the White House or had participated in phone calls in which she was asked to intervene in exchange for help in being named chairwoman of the Intelligence Committee. David Szady, the Federal Bureau of Investigation’s former top counterintelligence official who ran the investigation of Mr. Rosen and Mr. Weissman, said in an interview Monday that he was confident Ms. Harman had never intervened. “In all my dealings with her, she was always professional and never tried to intervene or get in the way of any investigation,” Mr. Szady said.

Nonprofit Groups to Push for Exceptions to Lobby Rule - (www.nytimes.com) Critics of the president’s anti-lobbyist policy say it assumes that all lobbying is suspect, even legitimate advocacy at the heart of a democratic process. When it came time for President Obama to pick a human rights chief, many around him thought Tom Malinowski was the obvious choice. As the Washington advocacy director for Human Rights Watch, Mr. Malinowski has fought slaughter in Darfur, repression in Myanmar and torture in the United States. He served in the State Department and on the National Security Council under the last Democratic president. But he had one liability: he was a registered lobbyist. The fact that Mr. Malinowski lobbied on behalf of genocide victims rather than military contractors, investment firms or pharmaceutical companies made no difference. Mr. Obama’s anti-lobbyist rules do not distinguish between those who advocate for moneyed interests and those who advocate for public interests, and so Mr. Malinowski was ruled out. But in the process, he has become the symbol of a deep discontent among many Democrats over Mr. Obama’s policy. “It’s an outrage,” said Stephen Rickard, executive director of the Open Society Policy Center, an advocacy organization. “Tom is one of the most effective and dedicated human rights activists in Washington, and you could get 20 people to say that. It’s extremely unfortunate that Tom and people like Tom can’t be brought in to use their talents.” The dispute over the policy underscores the tension between the grand gestures of the campaign trail and the undesired consequences once in office. As a candidate, Mr. Obama presented himself as a reformer who would purge Washington of the insidious influence of special interests. As president, he has found some of his own supporters among those purged. Although Mr. Obama has issued a few waivers to allow activists to work in his administration, the broad sweep of his rules points to the lasting damage of the scandal surrounding the powerful lobbyist Jack Abramoff, who pleaded guilty in 2006 to fraud, tax evasion and conspiracy to bribe public officials. The assumption underlying the Obama policy, critics say, is that all lobbying is suspect, even legitimate advocacy at the heart of a democratic process.

Stanford Points Fingers in Fraud Case - (www.nytimes.com) . Allen Stanford, the Texas financier accused of defrauding tens of thousands of bank depositors, said on Monday that he was not a thief. He denied that his operation was a Ponzi scheme and suggested that if any depositor money had been lost, it was largely a result of “Gestapo tactics” used by the government. “I don’t think there is any money missing,” Mr. Stanford said. “There never was a Ponzi scheme, and there never was an attempt to defraud anybody.” The government has said as much as $6 billion is missing. In an interview at his attorney’s office in Houston, a high-strung, emotional Mr. Stanford offered various theories about the problems that have engulfed his Stanford Financial Group and Stanford International Bank. He allowed that some of the assets held by his organization on behalf of clients might have declined in value. As explanation, he cited the economic crisis and actions the government had taken against him in recent months. But in another part of the interview, Mr. Stanford suggested that if any fraud had been committed, James M. Davis, his former chief financial officer, was to blame. “The investment and risk committee reported to Jim Davis, not to me,” he said. “The Stanford International Bank quarterly report was produced in Tupelo, Miss., under Davis’s direction and signed off by him. I trusted his integrity.”

A Bigger, Bolder Role Is Imagined For the IMF - (www.washingtonpost.com) Inside a cavernous assembly hall in downtown Washington, dignitaries gather twice a year for routine meetings of the International Monetary Fund. Before long, though, the room could take center stage in the IMF's transformation into a veritable United Nations for the global economy. Surrounded by blond wood paneling and a digital screen the size of a cinema's, central bankers and finance ministers would meet to convene a financial security council of sorts. Serving almost as ambassadors to the IMF, they would debate ways to put out the world's economic fires and stifle reckless policies before they ignite new ones. Bowing to a new economic world order, the IMF would grant fresh powers to the likes of China, India and Brazil. It would have vastly expanded authority to act as a global banker to governments rich and poor. And with more flexibility to effectively print its own money, it would have the ability to inject liquidity into global markets in a way once limited to major central banks, including the U.S. Federal Reserve. That image of a radically transformed IMF -- whose role in the global economy had turned largely advisory in recent years -- is now coming together through internal IMF documents, interviews and think-tank reports. Finance ministers from major nations will begin grappling with the formidable details of the IMF's makeover this weekend when they converge in Washington for the fund's biannual assembly. The changes, broadly outlined by President Obama and other leaders of the Group of 20 nations in London earlier this month, could take months, even years to take shape. But the IMF is all but certain to take a central role in managing the world economy. As a result, Washington is poised to become the power center for global financial policy, much as the United Nations has long made New York the world center for diplomacy. The IMF's mission is expanding so broadly that its managing director, Dominique Strauss-Kahn, said in an interview that the organization -- which underwent deep cuts last year before the financial crisis swept the globe -- may boost staffing in coming months, potentially creating dozens of high-paying jobs in the District.

Southern California office market is hammered by recession - (www.latimes.com) Vacancy rates have climbed as high as 30% in some areas, and landlords have been offering deep discounts or such perks as a year of free rent as an incentive to sign leases. Layoffs, tight credit and other fallout from the troubled economy have battered Southern California's office market, leading to vacancy rates as high as 30% in some areas. The pain is expected to continue for months, if not years, with vacancies rising even as the economy shows modest signs of recovery, according to industry observers tracking activity in the first quarter. "We have a rough road ahead of us," said Joe Vargas, senior managing director of real estate brokerage Cushman & Wakefield. "It's going to be a very challenging market for the remainder of the year." Desperate landlords in the Inland Empire have begun offering such perks as a year of free rent to attract tenants. In West Los Angeles, owners are steeply discounting the monthly cost of an office -- cutting rates that, ironically, grew so high during the boom years that many companies were forced to move out and find cheaper digs. Vacancy in Los Angeles County reached 14.3% in the first quarter, up from 11.2% a year earlier, according to a report released last week by Cushman & Wakefield. In Orange County, where demand has been dwindling for more than a year, vacancy ticked up to nearly 18% from 15%. Among the hardest-hit markets are the Inland Empire, Irvine and north Los Angeles County, all of which have been wracked by the losses of tenants in the troubled industries of mortgage and finance. Vacancies in all three areas have surpassed 20%, a sign of a very weak market. In Ontario and the area around Los Angeles International Airport, vacancy tops 30%.

Citigroup Credit Losses Rising Rapidly, Goldman Says - (www.bloomberg.com) Citigroup Inc.’s credit losses are growing at a “rapid rate,” undermining Chief Executive Officer Vikram Pandit’s efforts to stabilize the U.S. bank, according to Goldman Sachs Group Inc. While Citigroup posted first-quarter net income of $1.6 billion last week, the New York-based bank suffered an “underlying” loss of 38 cents a share, Richard Ramsden, a Goldman Sachs analyst, wrote in a research note dated yesterday. He repeated a “sell” rating on the stock. Citigroup, which received $45 billion in government aid, ended a five-quarter losing streak on trading gains and an accounting benefit for companies in distress. The bank, which cut compensation costs and took fewer writedowns, still reported higher delinquencies on home and credit-card loans. The results “included several one-time items which muddied the waters,” Ramsden wrote in the note. “The key question mark in our mind remains what Citi’s earnings power will be on the other side of the crisis.” Citigroup fell 48 cents, or 13 percent, to $3.17 at 10:29 a.m. in New York Stock Exchange composite trading. The shares had dropped 46 percent this year before today. Ramsden halved his estimate for Citigroup’s 2009 loss to 25 cents a share, while keeping unchanged his forecast for net income of 20 cents a share for 2010. He expects the bank to earn 40 cents a share in 2011. The analyst kept a 12-month price target for the stock of $1.50.

Investors Air Discontent With Bank of America - (www.nytimes.com) For more than 70 years, through good times and bad, the Eliasberg family stood by their bank. Their tiny lender grew up to become part of what is now Bank of America — tying the family’s fortunes to that of the nation’s largest bank. But now Richard Eliasberg, whose father helped found Baltimore National Bank, in 1933, says he is losing faith in Bank of America, and in its embattled leader, Kenneth D. Lewis. Like a growing number of shareholders, Mr. Eliasberg is alarmed by the daunting challenges confronting Bank of America. Mr. Lewis, the chairman and chief executive, is under growing pressure, both from within and without, to turn things around fast. “For the first time, I’m disappointed,” said Mr. Eliasberg, who owns a substantial number of Bank of America shares for an individual, though he has sold a third of his shares in the last year. Anxious shareholders are likely to get a bit of good news on Monday, when Bank of America is expected to report solid first-quarter results. Across much of the banking industry, tentative signs of recovery are appearing, notably in mortgage lending and trading. But Mr. Lewis, who built Bank of America into an industry behemoth by making a string of acquisitions, still has much to prove. Many of his investors are growing restive, and they are unlikely to be quieted by one quarter’s results.

Erin Go Broke - (www.nytimes.com) “What,” asked my interlocutor, “is the worst-case outlook for the world economy?” It wasn’t until the next day that I came up with the right answer: America could turn Irish. What’s so bad about that? Well, the Irish government now predicts that this year G.D.P. will fall more than 10 percent from its peak, crossing the line that is sometimes used to distinguish between a recession and a depression. But there’s more to it than that: to satisfy nervous lenders, Ireland is being forced to raise taxes and slash government spending in the face of an economic slump — policies that will further deepen the slump. And it’s that closing off of policy options that I’m afraid might happen to the rest of us. The slogan “Erin go bragh,” usually translated as “Ireland forever,” is traditionally used as a declaration of Irish identity. But it could also, I fear, be read as a prediction for the world economy. How did Ireland get into its current bind? By being just like us, only more so. Like its near-namesake Iceland, Ireland jumped with both feet into the brave new world of unsupervised global markets. Last year the Heritage Foundation declared Ireland the third freest economy in the world, behind only Hong Kong and Singapore. One part of the Irish economy that became especially free was the banking sector, which used its freedom to finance a monstrous housing bubble. Ireland became in effect a cool, snake-free version of coastal Florida. Then the bubble burst. The collapse of construction sent the economy into a tailspin, while plunging home prices left many people owing more than their houses were worth. The result, as in the United States, has been a rising tide of defaults and heavy losses for the banks. And the troubles of the banks are largely responsible for putting the Irish government in a policy straitjacket. On the eve of the crisis Ireland seemed to be in good shape, fiscally speaking, with a balanced budget and a low level of public debt. But the government’s revenue — which had become strongly dependent on the housing boom — collapsed along with the bubble. Even more important, the Irish government found itself having to take responsibility for the mistakes of private bankers. Last September Ireland moved to shore up confidence in its banks by offering a government guarantee on their liabilities — thereby putting taxpayers on the hook for potential losses of more than twice the country’s G.D.P., equivalent to $30 trillion for the United States.

Good News: Option ARM Resets Delayed - (www.businessweek.com) Finally, there might be some good news for struggling homeowners. Thousands of mortgage loans that were supposed to reset at a higher rate this spring won't be changing, putting off the grim threat of foreclosure or bankruptcy for many Americans by as much as a year. Unfortunately, the reprieve will only be a temporary one. A year ago, real estate forecasters were warning that spring 2009 would be the start of a whole new wave of foreclosures. Across the country option adjustable-rate mortgages (ARMs), an especially scary loan type often compared to a ticking time bomb, were set to detonate at an accelerating pace. But something happened that few could have predicted. Interest rates dropped to historically low levels and the wave of resets could now be delayed until well into 2010. As a result, many borrowers—who have the option of making payments so low that they don't even cover the interest, which is then added to the original loan balance—now have some breathing room. Third of Loans Deeply Delinquent: Credit Suisse (CS) estimates (click here to see the chart) that the resets will begin to accelerate next spring, rising from about $4 billion resetting in March 2010 to a peak of $14 billion in September 2011. The current level is about $1 billion. About $500 billion of option ARM loans are outstanding, according to the bank. "Things have gotten pushed out," says Chandrajit Bhattacharya, director in U.S. Mortgage Strategy for Credit Suisse. "Right now it looks like the big increase is probably going to be somewhere toward the middle of next year."

Wednesday, April 29, 2009

Lose California public pensions billions, get a bonus! - (www.sacbee.com) California's two biggest public employee pension funds handed out millions of dollars in bonuses last year to their top executives and investment managers, despite losing billions of dollars. The biggest bonus check, $322,953, went to Christopher Ailman, chief investment officer of the California State Teachers' Retirement System. It nearly doubled his base pay of $330,000 for fiscal 2007-08. Ailman's counterpart at the California Public Employees' Retirement System, Russell Read, received a $208,677 bonus to his $555,360 base pay in August, more than a month after he had resigned from the fund's top investment job. Despite continued losses in the market, both funds expect to cut more bonus checks, which they call "incentive awards," this summer. Retirement fund officials say bonuses like those paid to Ailman and Read help attract and retain top talent. It's also cheaper than hiring outside help to manage investments, they say. Still, the practice has its critics. "Paying bonuses – especially right now – it just doesn't look good," said James McRitchie, a retired state worker and publisher of the Elk Grove-based PERSwatch.net. "It just doesn't go over well with the public." Assemblyman Anthony Portantino, D-Pasadena, is pushing legislation to freeze pay for state workers who make more than $150,000 annually until 2012. The bill, AB 53, initially included a freeze on bonuses, but those provisions were removed "over concerns of breaking existing contracts," said Portantino spokesman Michael Tamariz. CalPERS has opposed the bill, saying that the mere whiff of limiting state employee pay has already hobbled its ability to compete for the best talent. "(We've) lost two potential investment candidates in recruitments lately due to the uncertainty of pending legislation that would affect incentives," said CalPERS spokeswoman Pat Macht. Nationwide, funds losing: The CalPERS and CalSTRS boards approve their respective funds' bonus plans, which reward employees depending on how investments fare compared to other portfolios or market benchmarks. So when the losses pile up – and both funds have lost billions of dollars since late 2007 – employees can still win bonuses if they lose less money than their benchmarks. Over the past 18 months, public pension plans nationwide have lost a combined $1.3 trillion, according to the Center for Retirement Research. A recent study of state pension funds found that obligations outpace assets by $237 billion.

Rising Risks in Municipal Bonds Worry Investors - (www.time.com) Municipal bonds have long been a no-brainer investment. But not any more. A growing number of analysts and financial planners are raising doubts about the bonds of local and state governments. They worry that a weakened economy, along with rising cost of benefits for city workers, will make it tougher for local governments to meet their obligations. "Munis don't offer the same sleep-at-night safety they used to," says Christopher Cordaro, a financial planner at Regent Atlantic in Morristown, NJ. Earlier this year, Cordaro, who has been a planner for 22 years, began advising clients for the first time in his career to trim their muni bond holdings. "Municipalities across the country are in rough shape." (See TIME's "25 People to Blame for the Financial Collapse") Cordaro isn't the only one having doubts. Last week, ratings agency Moody's lowered its outlook for the debt of local governments to 'Negative.' In its report, the ratings agency said local governments face "unprecedented fiscal challenges," over the next 18 months. The report also noted that this was the first time Moody's analysts were broadly worried about the ability of local governments to pay back their debts. Among the places Moody's finds to be most troubled are cities in Florida and California, because of the real estate bust, Indiana, Michigan and Ohio, which are being hurt by the drop in manufacturing, and Connecticut, New Jersey and New York, due to the financial crisis.

Some houseowners see giving up as best option - (www.msnbc.msn.com) Teresa Bondora and her family abandoned their two-story brick home in Atlanta rather than fall behind on their mortgage and $30,000 worth of home renovation debt. The decision was tough for Bondora, a home-schooling curriculum developer raised to believe that preserving good credit and paying bills on-time were key adult responsibilities. “I was willing to walk away and live with someone else while we get out of debt,” Bondora says. “I’m not worried about anything anymore.” Bondora isn’t the only homeowner making an about-face in her approach to the stigma of foreclosure; if anything, homeowners like her see that efforts to prevent foreclosure may make them more financially vulnerable than succumbing to it and starting anew. Despite new refinancing and loan modification programs made available under the Obama administration, mortgage experts say that many homeowners still face difficult choices in the short run. The latest options may not affect the market for a few more quarters, they say. When the real estate market first showed signs of weakness in fall 2006 — right when the Bondoras listed their home for $170,000 — the family faced tough circumstances. They watched at least a dozen seemingly qualified buyers fail to secure financing, and as Bondora’s husband, a contractor, began to see work evaporate. Buyers’ financing troubles continued over the course of the next nine months, even when the Bondoras dropped their price to $130,000 — a money-losing proposition for the family. With credit card debt mounting and no sale in sight, they borrowed from extended family to pay bills. Bondora began suffering panic attacks.

California unemployment rate highest since 1941 - (www.sfgate.com) The state unemployment rate soared to 11.2 percent in March, the highest since before World War II, leaving a record 2.1 million Californians out of work, according to a report issued Friday. Employment Development Department spokeswoman Patti Roberts said the March figure surpasses the 11 percent rate that occurred during the 1980s recession and brings California close to the jobless level of January 1941, when unemployment stood at about 11.7 percent. Roberts said unemployment is estimated to have been as high as 25 percent during the Great Depression. The highest reliable figure in state archives is the 14.7 percent rate in October 1940. The U.S. unemployment rate for March stood at 8.5 percent. "California's higher rate of job loss is primarily the result of greater exposure to the housing downturn," said Stephen Levy, with the Center for the Continuing Study of the California Economy in Palo Alto.

CNN Misses the Tea Party Point - (www.optionarmageddon.ml-implode.com) CNN and other left wing media organizations tried to write-off the “tea party” protests as some sort of manufactured right-wing conspiracy. They totally missed the point. Sure, lots of right-wing organizations promoted the tea parties, but listen to the message. The people who attended are sick of big government period. Many (most?) blame Republicans and Democrats equally. The lefties and the righties are still so blinded by their hatred of each other, they don’t see the emerging super-majority in the middle. They don’t see (yet) that they are actually in violent agreement, incensed as they are with nonstop government spending, in particular the bank bailouts. Anger over the bank bailouts unites virtually the entire country. And how very ironic that this inchoate union of right and left is forming in opposition to Mr. Post Partisan himself, Barack Obama. Anyway, this is a great video. It captures very clearly CNN’s editorial viewpoint of the affair. The reporter actually argues with the protester in the segment that was aired. It then features (at the 2:15 mark) a highly revealing confrontation with the CNN reporter and an articulate protester who shows why CNN’s viewpoint is totally misguided.

Fed Mulls Literal Destruction Of Your Savings - (www.nytimes.com) WITH unemployment rising and the financial system in shambles, it’s hard not to feel negative about the economy right now. The answer to our problems, however, could well be more negativity. But I’m not talking about attitude. I‘m talking about numbers. Let’s start with the basics: What is the best way for an economy to escape a recession? Until recently, most economists relied on monetary policy. Recessions result from an insufficient demand for goods and services — and so, the thinking goes, our central bank can remedy this deficiency by cutting interest rates. Lower interest rates encourage households and businesses to borrow and spend. More spending means more demand for goods and services, which leads to greater employment for workers to meet that demand. The problem today, it seems, is that the Federal Reserve has done just about as much interest rate cutting as it can. Its target for the federal funds rate is about zero, so it has turned to other tools, such as buying longer-term debt securities, to get the economy going again. But the efficacy of those tools is uncertain, and there are risks associated with them. In many ways today, the Fed is in uncharted waters. So why shouldn’t the Fed just keep cutting interest rates? Why not lower the target interest rate to, say, negative 3 percent?

Stiglitz Says Ties to Wall Street Doom Bank Rescue - (www.bloomberg.com) The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said. “All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.” The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street. “We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said. The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.” Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.

Tuesday, April 28, 2009

Biggest Real Estate Bankruptcy In History - (www.bloomberg.com) General Growth Properties Inc. filed the biggest real estate bankruptcy in U.S. history after amassing $27 billion in debt during an acquisition spree that turned it into the second-largest shopping mall owner. The owner of Boston’s Faneuil Hall and the South Street Seaport in New York City ended a seven-month effort today to refinance its debt. The company listed $29.5 billion in assets and debts of about $27.3 billion in the Chapter 11 filing. General Growth will continue operating its more than 200 properties. “We intend to emerge as a leaner company,” General Growth President Thomas Nolan said in an interview today. “We want to come out as a less leveraged company. Our business model remains strong.” General Growth collapsed after spending $11.3 billion to buy commercial-property developer Rouse Co. in 2004 only to get caught in the credit crunch and a U.S. recession that has cut spending and property values. Banks have reduced lending amid mortgage-related writedowns. Commercial real estate prices in the U.S. dropped 15 percent last year, according to Moody’s Investors Service. Retail sales in the U.S. fell in March as soaring job losses forced consumers to pull back. The filing lists Eurohypo AG, a unit of Commerzbank AG, as General Growth’s largest unsecured creditor with claims totaling $2.59 billion under two loans. Only 10 percent of the loans are held by Eurohypo, and the company is the administrative agent for a group of more than 175 creditors, the Eschborn, Germany- based company said in an e-mailed statement today. Noteholders are owed about $4 billion. Simon Gains? The bankruptcy may remake the nation’s mall business and allow General Growth competitors including Simon Property Group Inc. to buy properties and strengthen its position as the No. 1 mall owner, said Dan Fasulo, managing director at real estate research firm Real Capital Analytics. “I think Simon’s going to be able to pick up some of these assets on the cheap,” Fasulo said in an interview. Some of General Growth’s malls would be a good fit for Simon Property, based in Indianapolis, Simon Chief Financial Officer Stephen E. Sterrett said in a telephone interview today. “It’s a very good portfolio,” Sterrett said. “They have some very good assets. Some of them would probably fit very well in our portfolio, but now is probably not the right time to talk about that.”

When financial ruin is one misstep away - (www.latimes.com) El Segundo resident Kathy Caliup can't say for sure when it all started slipping from her grasp -- the credit card bills, the car payments, the rent. All she knows is that she looked around recently and realized her family was essentially one setback from homelessness. "It makes me physically sick," Caliup, 55, told me. "I lay awake at night wondering how I'll get by." Caliup's troubles mirror those of countless other people who have found, often through a combination of bad luck and bad decisions, that the tentacles of the recession are pulling them ever closer to financial ruin. According to the California Department of Social Services, requests for emergency food assistance have risen about 40% since this time last year. The number of food-stamp recipients is up 21% and welfare rolls have grown 9% after declining for almost a decade. "These are huge increases," said Lizelda Lopez, a spokeswoman for the agency. "There's lots of need out there." Caliup, a single mother of two, isn't what you'd call a reckless person. She's worked for just one company -- Macy's -- since she was a teenager. These days, she can be found behind one of the perfume counters at the Culver City store. Caliup came into some extra cash in 2004 when her parents passed away and she and her sister sold off their Inglewood home. Caliup used some of the proceeds to buy a new Toyota Highlander. The rest went to day-to-day expenses. Life dealt Caliup a body blow in 2005 when her then-15-year-old son was diagnosed with cancer. But the family handled the challenges and the healthcare bills, and they persevered. Her son's cancer is now in remission. Things remained relatively stable until last fall. That's when Caliup started to notice that the economy was chewing away at her commissions, leaving her with less money each month. Around this same time, the rent for her two-bedroom apartment was raised to $1,725 from $1,600. Caliup, like so many others, turned to credit cards. First one card, then another. Before she knew it, she was running balances on 12 accounts. Her total credit card debt now tops $25,000. "I don't know how it happened," Caliup said. "It just snowballed out of control." In February, she knew she'd have trouble paying the rent for her apartment. Caliup made a partial payment and contacted the property manager to explain her situation.

Time For Mankiv To Resign - (Mish at http://globaleconomicanalysis.blogspot.com/ ) On Saturday I checked my watch to verify the date. A quick check showed it was April 18. Just to be sure I asked my wife Joanne and she assured me it was the 18th. Likewise my computer said it was the 18th. For a brief moment, I thought we had flashed back in time and it was April 1. April Fool's day was the only rational explanation I could come up with for a column in the New York Times by Gregory Mankiw, professor of economics at Harvard. Please consider It May Be Time for the Fed to Go Negative. At one of my recent Harvard seminars, a graduate student proposed a clever scheme to [make holding money less attractive]. Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent. That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10. Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit. Mankiw's idea is to generate inflation (in this case defined as rising prices), so that people will spend their money instead of holding on to it. Mankiw clearly thinks rising prices and borrowing no matter how much debt people have is a good thing. I will come back to that issue in a bit in a discussion about "inflation targeting" but first let's take a look at this so called "clever scheme". Flaws In The Clever Scheme: Mankiw overlooks the obvious point that currency in people's possession is but a tiny percent of money supply. Indeed some 90% or so is sitting in checking accounts, savings accounts, etc with no serial number. So the schemed is flawed from the start.

Hawaii foreclosures soar 503% in March - (www.honoluluadvertiser.com) Foreclosure filings in Hawai'i rose to their highest level since the present real estate market downturn began, soaring a record 503 percent to 724 from 120 in the same month last year, real estate research firm RealtyTrac reported. A decline in property values and continued constriction of home sales have made avoiding foreclosure harder for many people who can't pay or refinance their mortgage in a poor economic climate that has included widespread cuts in wages and jobs. Last month, the state's unemployment rate hit a more than 30-year high of 6.5 percent. Based on RealtyTrac's count of total filings, Hawai'i's 503 percent increase in March was second only to a 563 percent increase for North Dakota. There was one foreclosure filing for every 700 households in Hawai'i. There were 29 states with a better ratio, which sharply contrasts with the position Hawai'i consistently had enjoyed before the middle of last year — among the 10 best states. The national average was one filing per 375 households. Nationally, there were 341,180 foreclosure filings in March, up 46 percent from a year earlier.

Goldman Sachs Tries to Shut Down Financial Blogger - (www.marketoracle.co.uk) "Goldman Sachs is attempting to shut down a dissident blogger who is extremely critical of the investment bank, its board members and its practices. The bank has instructed Wall Street law firm Chadbourne & Parke to pursue blogger Mike Morgan, warning him in a recent cease-and-desist letter that he may face legal action if he does not close down his website. According to Chadbourne & Parke's letter, dated April 8, the bank is rattled because the site "violates several of Goldman Sachs' intellectual property rights" and also "implies a relationship" with the bank itself. Unsurprisingly for a man who has conjoined the bank's name with the Number of the Beast – although he jokingly points out that 666 was also the S&P500's bear-market bottom – Mr Morgan is unlikely to go down without a fight. He claims he has followed all legal requirements to own and operate the website – and that the header of the site clearly states that the content has not been approved by the bank. On a special section of his blog entitled "Goldman Sachs vs Mike Morgan" he predicts that the fight will probably end up in court. "It's just another example of how a bully like Goldman Sachs tries to throw their weight around," he writes." (UK Telegraph)

US to put conditions on Tarp repayment - (www.ft.com) Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times. “Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”

Men bear the brunt of US jobs lost - (www.ft.com) The US recession has opened up the biggest gap between male and female unemployment rates since records began in 1948, as men bear the brunt of the economy’s contraction. Men have lost almost 80 per cent of the 5.1m jobs that have gone in the US since the recession started, pushing the male unemployment rate to 8.8 per cent. The female jobless rate has hit 7 per cent.

Carlyle to stop using ‘finders’ - (www.ft.com) Carlyle, the US private equity firm, has decided to stop using placement agents to solicit money from public pension funds following the indictment of a New York state political figure to whom it paid $12m in finder’s fees. The change in policy represents the latest fallout from an investigation by the Securities and Exchange Commission and New York’s attorney-general into alleged kickbacks paid to secure money from New York’s $105bn Common Retirement Fund.

Dividing debts in divorce - (www.latimes.com) Couples in the process of divorce spend a lot of time divvying up their assets. But in today's miserable economy, experts maintain that soon-to-be-exes should take even greater care dividing up the debts. Otherwise, your former spouse's job loss could end up hitting your balance sheet -- and credit report -- years after you think the divorce is settled. "This is one of the more difficult things to do and people often forget about it," said John Ulzheimer, director of consumer education at Credit.com. "But if you don't do it, or don't do it right, it can not only cost you money, it can cost you your credit rating for a long period of time." Unfortunately, even people who think they are dividing debt often aren't dividing it legally -- despite approval from a divorce court, experts say. Couples often think that they can assign repayment of debts in the process of a divorce -- e.g., you repay the Visa; I'll take the AmEx -- said D. Michael Bush, a Newport Beach-based lawyer. But unless they got the creditor's approval -- in addition to the court's -- the assignment is not legally enforceable, he said. "There has to be an upfront agreement that includes the lender, or the lender can go where the money is -- it doesn't matter what you did in court," he said.

Monday, April 27, 2009

Should the U.S. bail out California too? - (www.latimes.com) California, always a place of fresh ideas, has a big one for Uncle Sam: Treasurer Bill Lockyer wants a federal guarantee on the massive short-term borrowing the cash-strapped state must undertake this summer. Just as with a federally insured bank savings certificate, a U.S. backstop of California's debt would assure investors that their money was completely safe. In theory, that would mean the state could get away with paying a much lower interest rate on the debt -- saving California taxpayers a bundle. Lockyer doesn't just want a federal guarantee for California's IOUs. He thinks the U.S. should do the same for all states, counties, cities and other municipal entities that need help getting through the recession. This is exactly what it sounds like: a call for a major expansion of the federal bailout of the nation's financial system -- but this time ostensibly to buttress Main Street, not Wall Street. The populist argument is a slam-dunk. If the government can save Citigroup and American International Group, why can't it extend a hand to California? In terms of who's truly deserving of help, "We think California taxpayers stack up pretty well compared with Wall Street firms," said Tom Dresslar, Lockyer's spokesman. The treasurer has an ally in Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee. Frank will hold a hearing May 5 as a prelude to drafting legislation that could create a federal insurance program for municipal debt.How a Personal Finance Columnist Got Caught Up in Fraud - (www.nytimes.com) On Sunday, I returned from vacation, picked up the mail and found a disturbing letter from Charles Schwab & Company. It said that it had discovered unauthorized money transfers out of accounts associated with the financial planning firm I use. The situation was even worse than I had feared. It was my own planner, who was under investigation for siphoning off what appeared to be millions of dollars from client accounts. And, as Schwab’s note helpfully suggested, it might be a good idea to take another look at my statements for the last few years. In case it is not glaringly obvious, I write a personal finance column for a living. I am also the kind of person who derives joy from reading the fine print on bank statements and runs spreadsheets on my credit card spending. I thought I knew what I was doing. So if I can get mixed up in something like this, trust me, it can happen to anyone. So how did this happen? It starts, oddly enough, with one of my old articles. In 2003, when I was at The Wall Street Journal, I did a sort of secret shopper column on seeking financial advice. My wife and I had a couple of questions that we needed to answer, and we put them to five different types of advisers. One of them was Matthew Weitzman, who had started AFW Asset Management (now known as AFW Wealth Advisors) a few years earlier with his high school friend Jay Furst. We liked Mr. Weitzman’s advice and demeanor. His disciplinary record was clean and he had gone to good schools (Cornell undergraduate, Columbia M.B.A.). While we didn’t talk to him much over the next six years, his advice was always wise, and he was willing to work with us even though we had less money than his other clients. Fast-forward to last weekend and cue my jaw hitting the floor as I realized what the note from Schwab was implying. Sure enough, the next day AFW sent me an e-mail message — which another planner there said I should have received before the Schwab letter arrived — offering a bit more detail. According to AFW’s note, there were “certain irregularities in a limited number of client accounts.” The firm said it believed that less than 5 percent of client assets were missing but added that it might find more accounts that were short some money. Within 24 hours of learning of the problem, AFW said, it notified the Securities and Exchange Commission, the United States attorney’s office and the Federal Bureau of Investigation. The first two declined to confirm or deny that there was any investigation, and an F.B.I. spokeswoman did not return my calls. AFW also said that “in a related matter,” Mr. Weitzman was now on leave, was not expected to return (ever) and would have “no further contact with any client accounts.” It is too early to say exactly what happened and who is responsible. Mr. Weitzman did not respond to my repeated attempts to speak with him this week. But his lawyer, Marc Mukasey, who leads the white-collar criminal defense practice at Bracewell & Giuliani in New York, called me back. “Matt Weitzman has not been charged with a crime or any violations,” he said. “We’re looking forward to a resolution of this matter that satisfies everybody.”

In State Pension Inquiry, a Scandal Snowballs - (www.nytimes.com) The inquiry into corruption at the New York State pension fund started simply enough. Alan G. Hevesi, the former comptroller, was accused of using state workers as chauffeurs for his ailing wife. But by the time Mr. Hevesi resigned his office in late 2006, investigators for the Albany County district attorney’s office were examining a more troubling problem: allegations that Mr. Hevesi’s associates had sold access to the state’s $122 billion pension fund, using one of the world’s largest pools of assets to reward friends, pay back political favors and reap millions of dollars in cash rewards for themselves. “We knew this was not going to be a case we could handle ourselves in Albany County,” recalled P. David Soares, the Albany County district attorney. In 2007, Attorney General Andrew M. Cuomo’s office and then the Securities and Exchange Commission took over the inquiry, which has ballooned into a sprawling investigation involving some of the most prominent players in New York’s political and financial worlds. Hundreds of investment firms have been subpoenaed. Three people have been criminally charged and another has pleaded guilty to a felony. And the scandal has grabbed the attention of Wall Street, as members of the investment establishment’s top tier now face scrutiny. The Carlyle Group, the politically connected private equity firm, is among the companies whose transactions are being examined. Steven Rattner, just appointed to serve as the Obama administration’s point man in the bailout of the auto industry, has emerged as a significant figure. And an investment firm that manages money for the Hunts, the prominent Texas oil family that owns the Kansas City Chiefs football team, has already settled with the S.E.C., and one of its former executives has pleaded guilty to a felony and is cooperating with investigators.

Stanford Asks Court To Release Funds for Defense - (www.cnbc.com) Accused fraudster Allen Stanford is asking a federal court to lift a freeze on $10 million of his assets to pay for his legal defense. The Texas financier was accused by the Securities and Exchange Commission in February of running a massive Ponzi scheme involving high-yielding certificates of deposit, a charge Stanford denies. Nonetheless, the SEC obtained a total freeze on Stanford's assets and those of his companies, and a criminal investigation by the Justice Department is picking up speed. In a 12-page filing in federal court on Sunday, his attorneys argue "Allen Stanford will never have resources that remotely approach the resources of the adversaries he faces." The filing contends the SEC freeze "instantaneously destroyed billions of dollars of net value of Stanford companies worldwide" by causing a run on the bank during a global financial crisis. The filing asks that $10 million be placed in an escrow account controlled by Stanford's criminal defense attorney, Dick DeGuerin of Houston. And it suggests that the cost of Stanford's defense may ultimately approach $20 million.

Empty Florida homes may return to nature - (www.latimes.com) The Georgetown apartment complex was one of this city's most coveted properties back in 2005. Now Greg Chelius and Alex Size were touring it as if examining an exotic ruin.They walked past the unmanned guardhouse and its broken windows. Size snapped photos with a digital camera. Chelius lifted the green fabric on a fence tacked with No Trespassing signs. Building after building loomed in the near distance, all of them quiet and vacant. From Chelius' vantage, it was difficult to judge their condition. "We heard they were in such bad shape they'd have to be taken down," he said. "It depends on the drywall," Size replied. "And the rot. And the mold." They walked the eastern edge of the property, stopping at a place where they could glimpse -- through a thicket of weeds and Brazilian pepper trees -- the blue water of Old Tampa Bay, lapping at the property's edge. As if on cue, a circling pelican dive-bombed for a fish."It's just outstanding," Chelius said.These two men have big plans for the Georgetown property, 160 acres on the southwest side of the Tampa peninsula. But they are not planning to build. Chelius is state director for the Trust for Public Land. Size is from the nonprofit's St. Petersburg office. Because of the steep decline in property values here, they believe they have a chance to help local government purchase and preserve this stretch of waterfront. A few months ago, it was slated to be covered with luxury condominiums, "mansion" town houses and single-family homes.

High-end builder bids to recoup - (www.delawareonline.com) Whether you're a home builder or a home buyer, these are times when dreams don't always match with reality. At the luxury beach community The Peninsula on the Indian River Bay, where residents are pampered with a Jack Nicklaus-designed golf course and a wave pool, the tide of recession-driven frugality has pushed one builder toward a less-opulent vision. Faced with the reality that luxury homes aren't the hot properties they once were, Virginia-based builder Miller & Smith has decided to clear the slate with a May auction, with opening bids at $200,000 for houses that once listed for $890,000 -- a 71 percent difference. The houses are expected to sell for well above that opening bid, but the auction highlights how the once-thriving resort market has had to adapt to a high-end clientele cutting costs in sync with their less-wealthy neighbors. Once its inventory of houses in the 750-acre development is cleared, the builder will continue its efforts there -- but with a mind toward a more-affordable experience. "It will probably be a little lower price point. We will probably scale down the square footage a bit," said Rhonda Ellisor, vice president of sales and marketing for Miller & Smith, about any future building. "We know that the second-home market has softened." The recession is being felt sharply in the luxury market, partly because of a sense among consumers that opulent spending is out of place in a time of struggle. It also has become more difficult to get so-called "jumbo" mortgages used to finance multimillion-dollar homes. One Colorado builder is offering a financing package that lets shoppers buy the land now and postpone the building until market conditions improve.

State unemployment rate highest since 1941 - (www.sfgate.com) The state unemployment rate soared to 11.2 percent in March, the highest since before World War II, leaving a record 2.1 million Californians out of work, according to a report issued Friday. Employment Development Department spokeswoman Patti Roberts said the March figure surpasses the 11 percent rate that occurred during the 1980s recession and brings California close to the jobless level of January 1941, when unemployment stood at about 11.7 percent. Roberts said unemployment is estimated to have been as high as 25 percent during the Great Depression. The highest reliable figure in state archives is the 14.7 percent rate in October 1940. The U.S. unemployment rate for March stood at 8.5 percent. "California's higher rate of job loss is primarily the result of greater exposure to the housing downturn," said Stephen Levy, with the Center for the Continuing Study of the California Economy in Palo Alto.